Posted
by
Soulskill
on Tuesday August 07, 2012 @05:49PM
from the skynet-begins-in-our-stock-markets dept.

pigrabbitbear writes "Given the the endless mind-whirling acronyms, derivatives and structures of the financial markets, we're rarely served with a visualization that so elegantly illustrates the arrival of Wall Street's latest innovation. This is what High Frequency Trading — the official monicker of Wall Street's robot army — looks like, when specially programmed computers make massive bets at lightning speed. Created by Nanex, the GIF charts the rise of HFT trading volumes across all U.S. stock exchanges between 2007 and 2012. The initial murmur, the brewing storm, the final detonation: Not just unsettling, it's terrifying."

...why high speed trading is a good idea for anyone? It seems like the equivalent of slash-and-burn agriculture where you're destroying a resource (in this case basically sanity) in exchange for a one-time benefit of briefly being faster than your competitors.

So can someone explain how the world is a better place than if, say, you could only issue one trade per second?

What has happened is that there is a subset of people who are so consumed by their lust for money. Well this is inevetible of course, and is in large part a driver of the economy. A good thing when managed well.

But what has happened is that we have become unbalanced. In order to have a healthy economy, all sectors need to have their interests included. If we stray too far in one direction or the other, the results aren't pretty.

That's an interesting point, because the socialistic societies of the indigenous is what allowed the bison to flourish.

Note that there is some evidence that the Amerinds were well on the way to exterminating the bison after the Amerinds acquired horses.

It should also be noted that the reason they didn't exterminate the bison earlier wasn't their "socialistic society" but the fact that they were technologically limited to the point that it was impossible.

Note also that there is evidence that the bison population of the early 19th century, which is assumed to be "natural" was, at least partly, a result of the plagues brought from Europe wiping out the Amerinds who had previously limited bison numbers...

And note, by the by, that these same peoples seem to have managed to exterminate the megafauna in America in prehistoric times just fine.

It's not at all clear what wiped out the megafauna, but it happened so long ago that the people living then were definitely a different group of people living under a different social system.

FWIW, hunting has, indeed, been proposed as a reason. And it's not impossible. But so have plagues which the new immigrants from Asia carried. So have two or three different ecological catastrophes. And so has a "perfect storm" combining the prior ingredients. There isn't any good evidence. Certainly the Eurasian

So can someone explain how the world is a better place than if, say, you could only issue one trade per second?

The rich and powerful don't get richer and more powerful as quickly if you could only issue one trade per second. So HFT makes the world a better place, if you're rich and powerful, who are the people making the rules anyway.

Market liquidity is extremely important. If you decide you want to trade your shares you want to be able to do so quickly and with a low trading fee. And you want to be able to get the same price no matter where you sell them, London, New York, Hong Kong.

A high trading volume facilitates this. A limit on how fast a broker can trade could cause people to be unable to sell their stocks if they want/need to.

Many experienced investors believe that the three most important things about an investment are liquidit

Lets assume for a second that it is important to be able to trade a hundred times a second, which isn't even an exaggeration of what's already happening.

Then, logically, one would expect the entire financial world collapse every night when the markets close for hours.

Oh wait, nothing happens, and everything continues like normal the next morning!

Hence, the assumption that high-speed trading is vital is clearly false.

It's one thing to have a high volume of real trades, but it's entirely another thing to have a ludicrous volume of very small meaningless trades by third-parties that neither want to buy nor sell, but just want to "play the game" and skim off the top.

Market liquidity is extremely important. If you decide you want to trade your shares you want to be able to do so quickly and with a low trading fee.

It's obvious that this is extremely important... if your business model is based on many fast sales at low fees. But it's hard to see how millisecond transactions provide any benefit to the kind of shareholder that actually invests in businesses and expects to still be holding their shares weeks, months, or even years after having bought them. It's also hard to see what benefit the companies in question gain form having their share price bounce around by the millisecond instead of by the second or even the

It would just take longer for markets to equlibrate. Less volume, more volatility. Higher transactions costs. I think of HFT as just how markets work. It should be less and less profitable as we move forward and algorithms and cpu cost goes down. Market makers giving certain companies HFT advantages to make massive profits and charge the buyer a higher price, are clearly monopolistic practices that go against everything HFT is designed to do.

-wall street does *not* exist for the purposes of making money for those who play there

-wall street exists for people to take ownership of businesses they have confidence in and feel will grow as a good investment.

-making money is supposed to be a consequence of the business' positivity in the real world and how the investment played a role in that business.

The markets, despite your confusion, or the claims made by the new wave of exploitative greedy shitbags, are to facilitate publicly available ownership of businesses that have real presence, employees, products, and consequences.

Just because shitbags have turned the markets into exploits and dragged our leadership through bed with them, doesn't make their claims about what the market is for 'correct'. It just means that the oligarchy has persitent rhetoric and have established law to uphold it.

So, I'm guessing that it's the volume (number of) shares traded on a specific day, on a minute basis throughout the entire business day. Multiple data are included, representing the various trading markets in the US.

That makes:x: time (from 8 am to 4 pm, eastern time)y: shares traded at time x (multiplier? could be x10^1, x10^7, or who knows)chart title: the specific day depicted

The market collapsed because of massive fraud, especially in the home mortgage finance business. The criminals who stole our wealth would love to blame it all on computers, high frequency trading, Europe, oil, God, or whatever. Anything but them.

Guess computers are the whipping boys for the moment. There may be inherent problems with high frequency trading, but no one is sure. What we can be sure of is that fraud, insider trading, and excessive executive compe

There's an interesting parallel between the bots and scripts people use to play TradeWars 2002 and the bots and scripts people use to trade on the stock market. It seems to me that the TW2002 arms race may serve as a model for understanding the fundamental problem and what Wall Street or government regulators might be able to do about it.

This is what you get when the uninformed do journalism.This article has only HFT volumes to go by, and yet draws some dark conclusions about the future.It's all nonsense. I've been in HFT since before the beginning of the animation. I can say that the trades are mostly very simple. They are written with great care and attention to risk. HFT shops have no unfair advantage - like any trading company they put up risk and capital in order to attempt to make a profit. And when things go wrong they can lose bug and fast. The reason for growth in HFT is partly due to how easy it really is.More and more trading companies are trying to enter the game.HFT is like Target. They cut margins to next to nothing and make it up with volume.Knight is really a good example. They had the worst case scenario: heir robots were buying and selling on bad information and their risk systems didn't detect it. Bad for Knight. But did it crash the whole market? Did it have the same effect as the mortgage CDO fiasco? Not at all. HFT shops aren't leveraged. If they put up $1 they could lose $1. And often they do.

The only reason you feel this way is because of bad press. It's clear from your post that you know nothing about exchange trading, which traces its roots to before 1800.HFT does, among other things, market making. Market making is almost as old as exchange trading. It used to be that that a specialist would stand ready to buy or sell and would maintain a liquid and orderly market. It's a risky position: they are required to keep orders on both sides of the market within 3 ticks or best bid and best ask. Whe

Asimov's vision of the world economy being controlled by machines has become reality.

Unfortunately for us, the machines we actually put in place bear little resemblance to those he described. Instead of being programmed with the 3 laws, and therefore a help to mankind by eliminating poverty and famine, we have programmed them to enrich the few at the expense of the many.

Such a system can not, and will not, be sustainable - as History so abundantly proves.

For around seven years I programmed a derivative trading system. Unfortunately our company went out of business due to lack of capital and possibly because our large competitors were cheating (not obeying firewalls between trading for customers and trading for themselves).

I view high-frequency trading (HFT) as great for society. Here is why: What HFT gives you is the fairest and most accurate (best) price for something. When there are many, many trades, the price gap between the individual trades becomes so low that there is no chance that you'll pay too little or too much for something or that you'll wait too long for your trade to happen. I'm talking about people who just want to buy something, not HFT traders.

You're hungry and you want to cook yourself dinner. Your dinner is made up of commodities that are traded, except perhaps for the parts that you bought at the local farmers market. But you and the farmer used gas and a vehicle of some sort to make the transaction. If you rode your bike, your bike is lubed with oil and made of steel, etc. With HFT in play, everything that went into the transaction was bought and sold at the fairest price possible. Nobody got gyped because of low market volumes that day, and nobody had to pay a gigantic fee to a broker because the cost per transaction is now tiny.

Of course you have issues like the flash crash. The best way to look at the flash crash is like this. Shares of John Gotts (JG) are worth $40, based upon fundamentals (intrinsic worth) and an idea about the future. Somebody sold a gigantic number of shares of JG for $20. Excellent computer algorithms put in buy orders for JG at $15 and possibly foolish computer algorithms found a way to sell shares of JG at that price, foolish if they bought the shares for more than $15 or smart if they bought the shares for less. The spiral kept going downwards due to both foolishness and intelligence. You can see that there were many, many winners. Every algorithm that bought shares for JG at less than $40 had the potential for a huge windfall. There are no rules against creating an intelligent HFT to look for mini-flash crashes and make a killing as a result. Fortunately or unfortunately, many of the trades that did happen were unwound by the exchange.

Finally, what I need to stress here is that computers aren't trading with other computers. Teams of programmers working with traders are writing code that does their bidding. The computer is the trader's tool, not the trader itself.

From this, I would draw the opposite conclusion: we should oppose proposals for a financial transaction tax at all costs! If high-frequency trading is the disease, then a tax on transactions is not the cure. It would make government addicted to the new revenue and therefore dependent on the high-frequency traders, thus ensuring that those leaches will never go away.

A better solution, I think, would be to require stock exchanges to operate on a once-per-second clock. Any trade orders that arrive within each timeslice would be executed in a random order, so as to defeat any advantage the high-frequency traders would get by being fast.

Many HFTs will make near-simultaneous trades on different exchanges and profit because of the delay in one of the exchanges. An example will help me explain: let’s use the NASDAQ and EDGE exchanges, and say that ABC stock is trading at $1.00. The HFT will send a bunch of quotes (offers) to NASDAQ and EDGE, trying to sell ABC stock at $1.01. Once the NASDAQ order is accepted, the HFT can simultaneously cancel the $1.01 sell order on the EDGE exchange and replace it with a buy order at the original price of $1.00. EDGE immediately accepts that $1.00 order, because its system has not caught up to the new price of $1.01, and the HFT’s net position becomes zero. This is possible because of latency, which is jargon for delay in the system. The net result is, the HFT captures a $0.01 arbitrage. By scalping this tiny amount from many trades, the profits add up quickly

Let's repeat: the HFTs are putting orders on the system for which they have no intention of fulfilling. This is a violation of SEC rules, yet the SEC does nothing. There was an AC responder to my post who made a blanket denial cancellations were happening. Care to respond?

If you're saying that arbitrage should be illegal, you have no idea what you're saying.

Order cancellations happen all the time, and there's nothing wrong with that. In your example, the HFT has EVERY intention to fulfill their order at $1.01. They just got a better offer elsewhere first. Now that they have a short position at $1.01, of course they are free to see it at $1.

Do you even know how trading works? When for example you sell something on ebay, and the price doesn't hit your buy it now price(sell lim

The stock market of the 1920s was very different from the stock market of today. back then, the market was infested by greed-crazed slimeballs, get-rich-quick speculators with the ethical standards of tapeworms, who shrieked "buy" and "sell" orders into the telephone with no concern whatsoever for the nation's long-term financial well-being. whereas today they use computers.

I'm an Investment Adviser Representative, so I work in the industry, a mere pawn 2000 miles from Wall St. HFT hits home for me, as it costs my clients money. There's a legal foothold here to ban this activity, called Front-Running. If I hear a co-worker say "I'll place that buy order for 1000 shares of Google as soon as we hang up" and I then race over to my computer to place my own Google buy order first I can be prosecuted. It's called Front-Running because I'm racing my order in in-front of a trade I know is coming. (My new holding should bump up a tick when their order comes in next driving up the market price. It works more reliably with thinly traded stocks. And did I mention it's illegal?) And yet the exchanges, for payment, allow the high-frequency traders to see incoming trades. It's illegal, plain and simple. The question is why no one has stopped it yet. The CFTC has done some good investigations, I hear. I can't give investment advice as every person's situation is unique. But do you think more or fewer potential investors will want to get in the market once this criminal activity is stopped?

"Let me posit that HFT has driven a lot of people out of business: the specialists, execution brokers and day-traders who used to collect the large rents built into the system in the days of old. HFT and algo-trading practitioners are rent-seekers too, but their rents are far smaller. And the vast majority of the whining you hear is from exactly the people that HFT has displaced. I have read or heard nothing about how medium-to-long-term investors are being disadvantaged by HFT; to the contrary, their costs have gone down substantially.
As for destabilizing the system, sure, a lot can be done to improve the market structure and micro-structure. But we have just come through one of the most volatile and unstable periods ever; did you really expect this or any market structure to survive through this without showing the occasional crack? And what you got, even then, was the Flash Crash and some instances of erroneous behavior, the most egregious of which was Knight. In the days of specialist-and-broker intermediation, we got Black Monday without any macro stress of remotely comparable scale; we got lots of (human) fat finger errors all the time, too.
So, are you saying that it is morally and socially acceptable for one group of error-prone humans to extract large rents from the system, and it is not morally or socially acceptable for another group of (differently) error-prone humans to extract much smaller rents?"

If you think HFT is bad, then you must think $0.99 individual tracks, MP3 players, and digital distribution are also bad since the RIAA no longer dictates how you buy and what you do with the content. It's really not that much different.

Fundamental to the orderly functioning of markets is the idea that asset prices reflect the underlying value of assets they represent. In the case of stock markets, this means that the price of a stock at any given time should represent the perceived value of the assets it represents. This implies that trades are being made which reflect informed opinions and judgments about whether the current price of an asset accurately represents the present and/or future value of its underlying assets.

However, algorithms do not have the capability to make these types of judgments. Nor do they care about the present or future relationship between price and actual underlying value. All they care about is pricing inefficiencies.

This is why high-frequency trading is so dangerousi.e. because it does not care about the relationship between underlying asset value and current price which is the underpinning of orderly and well-functioning markets.

Why would any sane person invest in the stock market when they have no faith that asset prices are accurately reflecting the value of their underlying assets? High-frequency trading is now such a high percentage of overall trading volume that the long term value of an asset barely factors into its current price at all.

Ten years ago, a billion shares a day was considered to be huge volume.now its 4-5 billion shares a day, and let me tell you, all that extra volume isn’t coming from rational investors making judgments about the long terms values of stocks.

As one of the articles explains, HFT algorithms trade almost exclusively based on other trades. Guess what behavior is almost guaranteed to cause a bubble?

Human behavior.

Well, yes, that too. But positive feedback loops are a real bitch. In a real, physical system, positive feedback can be mitigated through damping, time delays, etc. In the worst case, you are still limited by the strength of your actuators - you'll saturate the system, or become slew-rate limited. Sticking a microphone next to a loudspeaker may make an unpleasantly loud sound, but it doesn't immediately become infinitely loud. HFT has the potential to blow up, almost without bound, almost immediately. Would the liquidity and purity of the market really suffer that much if the minimum hold time was, say, one second? At the very least, it would slow the ridiculous arms race of who can clear the most trades per second. I'd be pleased it we could free up the brainpower of some of those very smart people to solve more important, though less immediately profitable, problems. When a billion-dollar investment to shave a millisecond off latency times becomes worthwhile, it is time to change the game to straighten out our priorities.

Caps don't make it true.HFT is directly responsible for a reduction in spreads from 25c (or more) to 1c in liquid stocks. This takes money from the original market makers and gives it to the investors.If a tax of, say 25c per stock, were imposed, HFT wouldn't bear the cost. The investor would. This is because the spread takes into account the cost of trading. No company can market make at a loss, and since they make less than 1c the spreads would necessarily widen. QED

So do corporations in a fascist society. You know, privatize the gains, socialize the losses, pretend like the trades that cause flash crashes didn't happen. Honor some of those trades, but not others, etc, etc.

The SEC is CRIMINALLY NEGLIGENT in their refusal to so much as INVESTIGATE the links between certain HFTs (especially those run by the likes of JPM) and the exchanges they "provide liquidity" for. Pure fascism.

I think it had more to do with the government guaranteeing normal loans (subsidized by low FED interest rates), government subsidized loans and government entities buying sub-prime loans. If you were a bank, why wouldn't you make bad loans to sell to Franny and Freddy.

Because it should be fraud to make a bunch of bad loans, package them together, give them a high rating, and then sell them to the government (or anybody).

If I take droppings from a bunch of individual chickens, put them together, cook them a little, and then sell them as "Chicken derived high-fiber compound", I can't very well lie to you and tell you that I'm not selling you shit.

If I take droppings from a bunch of individual chickens, put them together, cook them a little, and then sell them as "Chicken derived high-fiber compound", I can't very well lie to you and tell you that I'm not selling you shit.

That was the point of the CDO though - to reduce the overall risk by joining smaller risks together. If you are a lender and you loan $1million, with a 10% risk of default then you have a 1 in 10% chance of losing everything and on average you get 90% back. If you make 10 loans of $100k at 10% risk then you've got a more complex risk but what you can avoid is the black-or-white nature of the single loan where you either get what you expected or get nothing. So by collateralizing a bunch of loans you are

A special program about the housing crisis produced in a special collaboration with NPR News. We explain it all to you. What does the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar loans to people without jobs or income? And why is everyone talking so much about the 1930s?

Which President are you referring to? Disclaimer: I'm not taking any sides between Democrats and Republicans. They both screw us and give to their preferred 1%'s.

All of the damage was set in motion long before our current President took office.

What caused the housing bubble was no more than insatiable greed for ever growing profits from someplace.

It was not enough that you could sell a mortgage to another company within a couple of weeks at most with some properly filed paper work. We needed it faster.

It was too hard to go to court and actually fight with home owners when disputes arose over mortgages. No. No. No. We needed deeds of trust and laws to bypass due process and just kick people out of their homes without any way to defend themselves.

It was not enough to make origination fees off normal home buyers and package up their loans in huge instruments and sell them. We needed new loans that made speculative investors take interest and start buying more houses than ever before.

If was not enough to make huge amounts of money off the speculative investors. We needed to fuel the ever growing beast as fast as fucking possible for as long as fucking possible.

What did we get? Poor unsophisticated people with bad credit, low income, and no chance in hell of paying off a mortgage that was going to have monthly payments increase 50%-100% within 24-36 months.

All of those speculative investors that had short term goals for properties within the next 3-5 years? They're screwed proper.

All of those average home owners who were lured in by cheap home equity loans with people whispering in their ears that there was no bubble? Totally fucked.

Knight Capital, a conservative market-maker, is going bankrupt because it's automated trading algorithms ran for 30 minutes in a poor configuration (losing money on each trade). How much did they lose? About $440 million dollars. In 30 minutes. Because someone didn't make it to the STOP command in time.

Not a bubble, just a way to destroy an organization in an automated fashion very quickly.

Just wait till two or three of these HFT machines goes wacko together and wipes out the entire market. These machines operate without human intervention. They buy and sell completely without human input. Now if 2-3 or more of these machines start operating in a repeating cycle with each other they could damage so many stocks simultaneously that in theory they could crash the entire market.

If the knight trades had been a little closer to sensible they could have triggered other HFT systems into buy and selli

You may be right that the $440 million changed pockets, but I doubt it. In the stock market, money appears and disappears like ocean mists.

Say Bill Gates has a billion stocks, they're worth $5 each, he's worth $5 billion on paper. Stock goes down to $4, he just lost a billion dollars. Nobody made those billion dollars, they just evaporated like the ether they always were.

You are missing a vital piece of information. You explain what a bubble is but not why it forms. The reason for most large bubbles is when currency is inflated and rates are set below a market rate by a central bank. This new money has to go somewhere and wherever it goes it causes a misallocation of resources. This can happen without a central bank but without an endless source of new money those bubbles tend to be small and burst quickly.

Also there is no such thing as the true value of anything. Value is completely subjective. Everyone values things differently. In fact that is the only reason anyone trades. I value the gallon of milk more than the price while the store values the money more than the milk. Nobody goes around trading things of equal value.

The only value of X is what you can sell X for. The price of most stocks is driven short term almost entirely by fashion. HFT simply capitalizes on the realization that the herd usually stampedes in the same direction. Long term it's irrelevent.

Lots of replies to your post! The bank collapse could have been contained had government enforced existing laws. There is/was a massive amount of fraud in the bubble, which the FBI was aware of at the time, as well as others who paid attention.. At the least, fraudulent loan applications could have been pursued. At a better level, bank/finance firms clearly misrepresented to investors about the underwriting standards when they sold the bundled products. We also have fraudulently signed and notarized documents on titles. So, lots of low hanging fruit in the real estate bubble.

The Federal Reserve has injected massive amounts of money into the system to try to contain the crash, and bubbles still persist. In the stock market, only chumps are getting prosecuted. The major players (Goldman Sachs and other HFT firms) are untouched.

The fine article [caseyresearch.com] states (on page 7): "The thing is, the SEC already has rules against placing orders not intended to be filled. Obviously, it doesn’t enforce them very well."

"The FBI significantly reduced its investigative efforts for fraudulent activity involving financial institutions (such as banks). Principally, the FBI scaled back its handling of lower dollar cases [SENSITIVE INFORMATION REDACTED]. We agree that the FBI must prioritize its investigations and first address the most egregious criminal activities. However, discussions with USAOs and analysis of USAO data revealed that no other federal agency has replaced the reduced FBI effort in this crime area. Therefore, an investigative gap exists for financial institution fraud (FIF), [SENSITIVE INFORMATION REDACTED]."

Michael Burry made billions (with a b) betting on the downfall of the CDO's. After writing an op-ed [nytimes.com] in the New York Times asking why the government (including the Federal Reserve) didn't see the same things he did, he was audited by the IRS.
So, again we're looking at a massive financial system where the rules are not being enforced.

Shouldn't it be pretty simple to stuff this worm back into its can?. Put a 1% tax on the sale price (not gains) for any stock which is held for less than 1 minute. HFT will instantly disappear. Human beings will never notice. What am I missing?

Stock shares are fungible. If I have 10000 shares of XYZ at the beginning and end of the day, and alternately buy and sell 100 shares every few seconds, how long have I held those shares? Add some 0s and tha's what pur human traders working for market makers have done for centuries.

HFT just automates what those humans did,and it's great if you have to trade some thinly-traded security for which there didn't use to be any market makers (because it wasn't worht a human's time to do the math when so few shares traded). It really sucks when the best bid/ask out there allows you to buy for $3 or sell for $1 - I'm happy enough to see this move to $1.60 and $1.50, and don't care at all that a different broker is making money as a result.

This is such crap, my employer isn't even part of the S&P 500 anymore and over 1% of the total shares trade each day on the market. Any listed security is going to have plenty of trading partners. Quit trying to justify the salami attack on the market that is HFT.

Back late Fifties a smart, rich old trader (who also happened to teach econ) was asked by a government panel what he'd do to "fix the market." He specified two things: eliminate puts and calls; any stock bought must be held minimum six months.

No the problem is that it will not disappear because it will move to the side. Case in point UK. They have a stamp tax on stocks. What happened? The financial industry created CFD's Essentially these are leverage products that trade on top of the stocks (sorta like futures) are not subject to the stamp duty. Granted they don't get the stock benefits, but they still warp the market.

As somebody who works in the market, the solution is to introduce a 50 ms holding rule. It would work as follows. You put in a bid, or ask. The moment it goes onto the market you have a 50 ms waiting period before you can put in another bid or ask. You can cancel your original bid and ask within 1 ms, but you cannot put in another one until your 50 ms is up. This action will introduce a delay and slow the market down.

Transaction taxes are pointless. The financial industry is based on the notion of creating an artificial world. Stocks, money, etc are all artificial human constructs. Thus they can create a new construct, like CFD's, or move back to OTC, etc. These constructs will warp the market in the same way, but using indirect forces. The only real way to stop HFT's is to put in speed bumps like the 50ms holding rule I was commenting on.

As somebody who actually deals in the market and writes algos, I have to add you have no idea what you are talking about.

HFT by itself does not push the price around. What HFT does is be the catalyst to any slight news. Think of it as follows. Put a fire in a forest and it burns, but it burns with some control. Put a fire in a forest that 100% oxygen and you don't have a chance in hell. This is HFT in a nutshell.

What happens when there is any slight movement whatsoever the HFT will overdo the moves. This then leads to the problem of psychology where traders will ask, "maybe there is something wrong with this company and they begin to sell off even more." The 100% pure oxygen HFT will then begin wild fire that nobody can control.

HFT is a problem and it needs solving. Case in point, America uses much more HFT due to the lower market costs. Europe is not better, it is that in Europe costs of doing business are much higher hence not as attractive for HFT. Where have all of the screw ups been? Oh yeah America...

If the government decides it's not in the public interest they can stop it. At least they should tax it so as to extract the maximum revenue. E.g. 0.1% on every transaction, waived if you hold the instrument more than 10 minutes.

A great deal of their advantage comes from housing their computers as close as possible to the stock trading computers. The gov't allows them to store and connect their equipment so closely, giving the HFT traders an unfair advantage. If the gov't wanted to stop it, they would simply say: "Nope! Go put your servers somewhere else!"

HFT would become unprofitable for many of the most abusive uses overnight.

Depends. If it is following the general idea of the stock market, i.e. more efficient allocation of resources such that companies, investors, and humanity as a whole tends to grow, then yes, it is progress.

On the other hand, if it is simply the investor equivalent of a bot network, intended to screw their clients, destroy companies, and set humanity back a few decades / centuries / millenia, then no, it is not progress.

At the end of the day, when all of the balances come due (so to speak), the market must p

In your world the ideal market is a place where no one can ever trade. In my world the ideal market is where anyone can trade almost instantly at or near the desired price. Guess which one is closer to what HFT actually is? Don't let your jealousy of the rich man being able to roll over his capital much easier than you cloud the fact that no one is forcing you to complete a transaction. HFT is only providing a solution to the supply/demand of the market at any given point in time. It does not make the market. It does not force you to sell a share. It does not force you to buy a share. It does, however, enable you to sell your shares almost instantly at the asking price. And it does enable you to buy stock almost instantly at the bid. Now if you're a day trader trying to make money off the spread, HFT will eat your lunch. If you're an investor, however, HFT is your friend.

Strangely enough, the actual number of shares traded [nytimes.com] is declining after having peaked a while back, which seems to fly into the face of people who think that HFT is skewing the market. You'd think that if HFT businesses were just rolling the same cash over and over, this would increase the total number of trades and thus add to the overall volume of the market. But no, that's not the case. What's happening is that when their algorithms want to buy stock, they will buy it from you faster than anyone else. And likewise on the other end of the transaction. How does this affect you, if you manage to make the trade you were going to make anyway?

The REAL problem with the market is government money printing which is now pouring trillions into the market every year so that stock prices inflate not because of any actual connection to a company's performance, but because the economy is so bloated. It wouldn't matter if the market only went up, but the higher you go, the further down you get to fall when falling time comes...

HFT is only providing a solution to the supply/demand of the market at any given point in time

NO. HFT is figuring out that I want to sell at $3 a share, and someone else wants to buy at $5 a share, then buying from me and selling to them before the other party can find my deal. Without HFT, We might have met in the middle, and both seller and buyer make a dollar per share on the deal. HFT, just leaches $2 out of the market for what? "Liquidity"? You've got to be kidding me. Go fuck yourself.

Correct. For the financial world it's the new normal. And actually, the financial landscape has now become more egalitarian than it ever has been because the cost of setting up a respectable high frequency operation is so low. Basically, you're looking at a few relatively inexpensive 1 or 2U boxes colocated at the trading venue sites and you're going to need to rent the fairly expensive high speed links between them. Way way way less than the traditional cost of setting up a bricks and mortor trading shop.

The HFT shops I've worked at are all for transparency.Dark pools are considered inefficient.When you trade on an exchange all the quotes, prices, volumes and trades are public. What else would make things more fair?

When you trade on an exchange all the quotes, prices, volumes and trades are public.

...except the quotes that cannot be displayed because they lock the price shown at another exchange. Or orders that can execute at subpenny increments, but must be ranked at penny increments. Both of these contribute to a "dark pool" effect even on the lit exchanges.

And that is why the use of computers is better, because it enables the transparency you crave.

Could you define "transparency" for us? Because you don't seem to mean it the same way as the rest of the world.

HFT may indeed have created something resembling "transparency", but only insofar as it has made the entire market no more meaningful than a biased random number generator. What does it mean to conservatively invest in a company with strong financials and good growth potential, when entire sectors rise and fall with near-perfect correlation? Or more to the point, why do we even have a stock market?

If it makes me a Luddite that I believe "investing" should have at least something to do with lending someone with an idea money in exchange for a cut of the profits, then I'll accept that crown proudly. When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?

We desperately need to implement at least one one of two really, really simple solutions - A transaction tax, and an end to intraday trading. Either of these would kill HFT overnight, and good riddance!

What does it mean to conservatively invest in a company with strong financials and good growth potential, when entire sectors rise and fall with near-perfect correlation? Or more to the point, why do we even have a stock market?

That has little to do with HFT, and a lot to do with the fact that the price of just about everything intangible is driven first by fashion, and only a distant second by any underlying value. It's always been that way, but effective global communication has unified financial fashion sense, to where on any given day everyone seems to rush into or out of cash. All of that is noise though, it's only day-by-day that things are strongly coupled. Over the course of years you see prices diverge sharply between good comanies and shitty companies (ignoring bailouts for the moment for the sake of my blood pressure).

When "investing" means trying to game the underlying system, do we really wonder why the economy sucks?

Markets in the modern sense were invented in the 16th century, and speculating has dominated "investing" for the entire 4-500 years. It's not a problem per se, as long as we have regualtions to limit margins and counterparty risk. It has no real effect on the economy. (Bubbles suck, but require non-speculative investors to get foolishly drawn in to get big enough to matter).

We desperately need to implement at least one one of two really, really simple solutions - A transaction tax, and an end to intraday trading. Either of these would kill HFT overnight, and good riddance!

Spoken like someone who doesn't understand why market makers are so valuable. Thinly traded markets blow goats. The cost to low-volume individual traders like me is very high when large bid-ask gaps appear. Narrowing the bid-ask gap is win-win: the casual buyer, the casual seller, and the market maker all come out ahead!

The government need not intervene in that way. Rather, the SEC should stop looking at tranny porn and investigate the links between the HFT bucket shops and the exchanges (ie do their fucking jobs and enforce existing laws and regulations). Many are on the up and up, but some are linked in such that they can frontrun orders, stealing from human traders (ie they see someone place an order for a stock, and they rush in and buy before the order can be placed, raising the price by a few cents, then sell it to

Which is the problem in all of this. Any broad 'plan' can be executed just as well by hand as it can by HFT computers. People who are seriously concerned about shifting the entire value of a company or a market move billions of dollars in a single transaction and don't particularly care about nanosecond to nanosecond events.

Everything else is being scraped together the same way traders did before, only faster. Which isn't really good or bad. Stupid people made stupid trades, stupid people design bad algorithms and made stupid trades, people make mistakes, people programming computers make mistakes.

Based on what? Just increases in volume?Grab your pitchfork!I'd recommend waiting for a little more evidence.So far all research into the subject has concluded the HFT is good for markets. But don't let facts dissuade you.

You don't see anything slightly unusual about basing the financial underpinnings of our economy on computer programs that interact with each other and dictate the value of companies not based on actual profits, revenues, results, business methodology, strategic planning, or company history, but rather base the primary value of the company solely on the current trend of their stock, driving company value up and down in an attempt to exploit nanosecond timing to skim fractions of pennies off actual sales & purchases?

We've seen several examples of bugs in these programs that translate into financial ruin for not only the people running the bots, but random companies as well until the trades get reversed. How much faith do you have that out of hundreds of these bots, none have any bugs that pose a greater risk? (Knowing that all programs have bugs, and we've seen this exact kind of problem already happen due to bugs)

I guess I'm a luddite for wanting a financial system that pretends to be based on reality.

Or, you know, maybe it's people who want price to actually reflect value instead of taking wild swings? If I buy a barrel of oil, I want it to be because I believe that a new technology has been implemented to make it more valuable than it used to be. Buying it simply to wait for the HFT-fueled upswing serves no purpose other than to destabilize the market for the sake of speculators. It's a negative damping effect, and those never end well.

Everything is getting faster, with greater degree of computer involvement.

HFT is not wrong because it uses computers, HTC is wrong because the algos react only to change in prices and have no input whatsoever on the actual value of the enterprise behind the stocks. That is: the HTC reaction is based on the ones perception on the perception of the others - it is tolerable for low levels of "second hand perceptors" but... when the level of them is high, the risk of "computerized market panic" increases dramatically.

It’s certainly fair to say that if you take a long, five-year view, then you can see a clear rise in trading activity. But it’s also fair to say that there’s something quite literally out of control going on here. Just as the quants at Knight found themselves unable to turn off their machines for 30 long minutes last week, the HFT world in aggregate seemingly has a mind of its own when it comes to trading patterns. Or, to put it another way, if there’s a pattern here, it’s one incomprehensible to human minds.

Everything is getting faster, with greater degree of computer involvement. Deal with it mentally or sell everything you own and go live in a cabin in the woods somewhere.

if only the woods could actually support 7 billion human beings, we could all go live there. But since they can't, we'll need to figure out a way to be more productive than machines which are increasingly capable of performing more and more work that only a few years ago required a human being to do.

Just how many new occupations has the economy created in the past 20 years? How many occupations have been automated and rendered obsolete?

Unless we start paying people to have fun, enjoy themselves and frolick in the park there is not going to be much work left for anyone to do.

We work much less now than we used to, and we do meaningful work MUCH less than we used to. The hordes of retail clerks, marketers, etc. are all repurposed farmers. And probably the make-workish profession of all? The people who play games with numbers on stock markets.

In summary, we DO pay people to have fun, enjoy themselves and frolic. Except not in the park... people like to think they're useful.

You may not be aware that the derivatives market, where much of the high-frequency trading occurs, is valued at $791 TRILLION dollars (with a "T"). That's many times the total gross domestic product of the entire planet. And not one dime of that money represents anything that exists. It is not equity in a company that can be used to build a plant. It is not "shares of stock". It is not "money in the bank" that can be lent to individuals or companies.

When you've got that much wealth tied up in the virtual world, HFT could easily warp the value of the "real world". It can corrupt economies. A little hiccup in the derivatives market was all it took to cause an economic collapse in 2008 that is still being felt worldwide and has cost the United States upwards of $3Trillion just in ongoing bailouts and the rolling bailout knows as Quantitative Easing. That little hiccup is why your house is still only worth about half of what it was in 2007.

You don't have to be a Luddite to be concerned about the secretive, looking-glass world of "The Market".

What caused the economic collapse was the bubble in the housing market that caused people to take out unreasonably large mortgages they had no possibility of repaying.

Not at all. Every subprime and underwater mortgage in the US could have been paid in full with significantly less than $500billion. Yet, just the first TARP bailout of the banks was what, $900billion? And subsequent banking bailouts come to another trillion, trillion and a half, not to mention "quantitative easing" which has cost us another half to one trillion.

AIG did not collapse because of people not being able to pay their mortgages. Same with Merrill Lynch. They were taking those mortgages and leveraging them thirty to a hundredfold. And the thing with leverage, in money as in physics, is that a small bit of energy at one end of the lever makes a big movement at the other.

And the problem gets worse to this day. Derivatives are inherently dangerous, but the risk is socialized so that the next time a big bank messes up, maybe from a little hiccup in their automated trading model, it's you and I that are going to be on the hook for the damages, just like last time.

And still, there is extreme political opposition to tightening up the regulations on these guys. Any politician who makes any effort to clean up this dangerous mess is targeted for destruction (example: Elizabeth Warren).

HFT has introduced a new era of price instability and top-down manipulation. HFTs read headlines that have been crafted to create certain responses which get front-run. They cause flash crashes. They bankrupt brokerages when they go awry.

It is the fault of the exchanges. They should kick these guys to the curb, but they are making too much money on them. They have driven retail investors out of the market instead. As such, these HFTs overwrite the pricing mechanism